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I had to close my business before the term of our commercial property lease was over. As part of the negotiations in a lawsuit, I had to pay a certain amount as a penalty for breaching the contract. Is this deductible? If so, how much? Does the same rules apply if I was a co-signer and had to pay this penalty?


Expert Donna Atkins's Answer:

 As the operator/owner of a business the cost appears to be an expense of closing the business and should be deductible as an ordinary & necessary business expense.  If the expense was not extraordinary compared to the cost you would have paid under the contract, then it should fall into the ordinary & necessary cost to close the business.  As a co-signer on a commercial lease, the deduction of expenses depends on your capacity as a co-signer.  If your capacity is you operate the business as an employee and/or you are a co-owner of the business, then assuming the costs are ordinary & necessary costs of shutting down the business - you would possibly have employee job related expenses (co-signed to keep the business operating and keep your job) or as a co-owner business related expense (possibly passive expenses if you did not particpate in the business operations).  Otherwise as a co-signer, your expenses might be considered personal and non-deductible.  The facts and circumstances surrounding the reason for co-signing need to be analyzed.  

Donna Atkins, CPA

New Hampshire

21 yrs experience

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